Consequences of a long, deep recession – part III

Summary: this series speculates about the consequences of a deep and long recession over the next few years. How might we react? How might this change America? The first post examined our alternatives. The second discussed possible changes in our financial system. This chapter looks at the effect on Americans, and America. This series is an expanded version of my post of 12 February.

A more granular look at the political implications

What happens to the people unable — or unwilling — to pay their mortgages? Political scientists, going back to Alexis de Tocqueville’s “Democracy in America, note that American values are determined by mass behavior. Divorce and abortions are bad, until lots of folks do them. Then they are considered empowering and life-affirming. The moral stigma of illegitimacy and bankruptcy have both largely faded away since the last severe recessions in 1973-75 and 1980-82. Economists will find the resulting behavior change inexplicable and astonishing. So will lenders.

Will the State sidewith creditors or lenders? Will legislators favor voters in the 50 million American households with mortgage? Or will they side with the malefactors of great wealth and Wall Street CEO’s? Legislatures could sneer at these voters, then join the unemployed after the next election.

There are ample precedents in our history for legislative action favoring debtors. For example, during the Great Depression several states (e.g., Minnesota) passed foreclosure moratoriums. These are also appearing today, in various forms).

There were also extra-legal community actions, in the long (and checkered) tradition of American vigilantism. Most notable were the widespread “penny auctions” of farmers’ land and equipment at which his neighbors forcibly prevented competing bids. See this description, along with its famous photo. Strong communities find their own ways to cope. That most financial institutions are national — not local — will make these measures even easier today (local institutions often having more local knowledge and legitimacy than national institutions).

Also remember that the Great Depression was generations ago, before the maturation of 4GW. The techniques of 4GW make mass popular action easier and more effective. The US civil rights and anti-Vietnam War protests are prime examples, but already ancient. Collective action will appear much faster today, as our institutions’ legitimacy has greatly faded since the 1960’s.

Conclusions: will these drastic measures work?

To answer this, first define “success.” We can guess at the effects of these steps in this scenario:

1) These measures will slow the decline, albeit with large scale and unpredictable side-effects. This buys time for our economy’s natural healing mechanisms to work.

2) Nationalization of the health care and financial sectors (de facto or de jure) would expand the US government’s size and power. This would be a major change in US public policy change, a repudiation of the post-1980 dominance of private-sector solutions. I doubt health care and finance would be the only sectors affected.

3) Any large-scale collective action by citizens would have unpredictable but perhaps large and long-lasting effects, esp. if rooted in strong institutions.

The steps forecast here are only illustrative in nature, the first phase in the end of the post-WWII economic and geopolitical regime. These speculations help us see the range of futures that lie before us, and their consequences. This is a harsh scenario, but even so it is not Armageddon. One reason, perhaps, for the defiant optimism of people repeating the “Dude, where’s my recession” is fear. We have had only two recessions in the past quarter-century — and those the two lightest recessions since WWII.

Recessions are part of the business cycle, part of life. The economy must breath in and breath out. They are painful, like so many things in life, but nothing to fear. That is the most important conclusion of this analysis.